Half Your Advertising Budget is Wasted

(Revised 4/18)

Most marketers know the old saw from John Wanamaker, considered the father of both the modern department store and modern advertising, that goes: “I know that half of my advertising dollars are wasted … I just don’t know which half.”

The quote speaks to the reality that many marketing programs are not easily justified on basic return-on-investment measures, and that advertising in particular ends up being a leap of faith because it’s particularly expensive and its direct benefits particularly difficult to quantify. (Recall that prior to becoming CEO of Mark Logic, I ran marketing and/or product marketing for three different software companies over a span of about 15 years.)

I remember when enterprise marketing automation (EMA) systems emerged in the late 1990s, making big promises about measuring marketing return on investment and speaking of a new accountability in marketing. (The EMA category was subsequently rolled with SFA and CSA to create CRM.)

At first I was wowed and eager to learn. I had spent years wondering how to get meaningful ROI measures for B2B marketing programs. Determing marketing ROI is easy when you send 10,000 pieces of mail that cost $1 each and propose a new vacuum cleaner for $300 that costs $150 to produce and ship. You breakeven at 67 vacuums (a 0.6% response rate) and have an ROI of 200% if you can get a 2% response rate.

In B2B markets, such as enterprise software, the problem is infinitely harder.

• There are multiple interactions (e.g., three newsletter sends, five whitepaper downloads, three seminar attends, two executive breakfast attends, two userconf attends, and eight direct mail responses)

• With multiple individuals (e.g., the CIO, the data warehouse director, five DBAs, and three database programmers)

• Over an extended period of time (months, if not years)

• And each new customer has a follow-on purchase pattern for expanded deployments and new applications

Now that’s a hard marketing ROI problem and one worth solving. Needless to say, the EMA/CRM systems didn’t — and I believe still don’t — offer much help. They simply echo the vacuum cleaner example above, letting you enter cost data for each campaign, associate leads to campaigns, divide program costs by the leads and opportunties generated, and then declare the marketing ROI problem solved.

I’d always thought of marketing more like oncogenesis: keep hitting cells with various agents and eventually and unpredictably something would mutate in the nucleus. It’s an unfortunate analogy, but I believe nevertheless an accurate one.

So now you know why my ears perk up when I hear technologists — not marketers — talk about solving marketing ROI problems and bringing new accountability to marketing.

So I must admit, it got my hackles up when Eric Schimdt starting adding the new marketing accountability message to his Google stump speech. (See this short blog post, this ad agency analysis blog post, or this presentation by John Battelle, slide 22.)

“Corporate marketing is the last bastion of unaccountable spending in corporate America.” – Eric Schmidt, Google.

If politicians can declare war on drugs, terror, or poverty, then why can’t CEOs declare war on advertising? Especially when everyone knows that half of it is wasted anyway? I, however, have a few problems with this.

• Marketing departments are Google’s customers and provide, oh, about 100% of their revenues. Declaring war on one’s customers is neither nice nor wise.

• Marketing departments have always known that advertising/branding and lead generation are separate activities, with very different cost profiles. For the most part (with some known exceptions) advertisers are using the web for direct marketing, not branding. So it’s an apples-to-oranges comparison that was, incidentally, equally possible pre-web (e.g., direct mail vs. print ads). And it’s a bit like your liver arguing with your brain over their respective, relative importance (you need them both, period).

• If you’re going to claim that you have eliminated the elusive wasted half of advertising, then you’d darn well better do it — and not simply substitute it for a new wasted half in the form of click fraud.

That is, you don’t make much progress if you turn advertising into direct marketing and then waste half of the new direct marketing budget on click fraud. So we’re still wasting half the budget — it used to be on advertising who’s value was unknown. Now, it’s on clicks that were either deliberately malicious and designed to waste our money, or on clicks where the marketer is a hapless victim in someone else’s self-enrichment scheme. Either way, I think I prefer old-school “waste” to the new one.

While I won’t do a deep dive on click fraud here, I will tell you why I find it so worrying

• Virtually 100% of Google et-search-alia’s revenues come from pay-per-click advertising. So the big companies will not be eager to mess with it. (I recall something about not killing geese who lay golden eggs.)

• The search/portal vendors are not being transparent about the extent of the problem, or what they are doing about it. I view opacity as a bad sign.

• It’s too easy to perpetuate. If you want to take revenge on evil laywers, then go Google mesothelioma and click 20 times on the adds. Congratulations, you’ve just committed about $1000 worth of click fraud. (Please don’t try this at home folks.) And that’s without bothering to program bots/spiders to click for you. Or hiring offshored labor to do the equivalent. (Both practices, I’m told, are actually in use.)

• The incentives are there. If I want to get the closest thing to “free money” I can think of, I should setup a few websites that have high-value adwords, setup Google AdSense, and then click myself on those ads all day long, write a bot to do the same, or offshore the task to India.

See this article in today’s San Jose Mercury news on click fraud for more.

The great irony of all this: after the hype burns off, the average click-thru rate on search ads is, I’m told, around 2% — almost exactly the same average response rate achieved on traditional direct mail.

Ouch.

Footnote: see this excellent New Yorker article for an overview of the traditional advertising business and how it’s adapting to the new Internet world.